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Trading Energy on Old Assumptions is 'Like Playing Russian Roulette With an Automatic,' Says Craig Pirrong in World Energy Monthly Review

Posted on: Tuesday, 17 January 2006, 18:00 CST

"Energy trading is now poised to become an integral part of broader financial markets," writes Dr. Craig Pirrong, energy markets director of the Global Energy Management Institute and professor at the University of Houston, in the January issue of World Energy Monthly Review. This assertion is evidenced by new players such as hedge funds, commercial banks and investment banks that have entered the energy trading ring. Dr. Pirrong asks, "I wonder if the plethora of new players has sufficient appreciation of the distinctive risks inherent in energy markets."

"Understanding risks and opportunities in energy markets requires a deep understanding of the nature of energy commodities (and) the characteristics of energy infrastructure," Dr. Pirrong continues. "Moreover, the idiosyncratic nature of energy commodities (such as the non-storability of power) means energy prices often behave very differently from interest rates, equity prices, exchange rates or even the prices of other widely traded commodities, such as gold."

He asserts, "Using intuition and models taken off the shelf from other financial markets to understand and manage energy risks is like playing Russian roulette with an automatic."

Education and certification for the energy industry are crucial to help trading and other financial organizations identify the people who can help them succeed in this market. Dr. Pirrong cites the Bauer College of Business at the University of Houston and the Global Association of Risk Professionals as two institutions that offer such industry-specific education and certification, while asserting that more such programs are needed.

"An understanding of the unique character of energy risks must permeate trading organizations," he writes.

Other features include Matthew Simmons looking for supposed "missing barrels" and a close look at the producing regions of Eastern Europe and India. Thomas Kornegay from the Port of Houston Authority examines the security issues faced during hurricane evacuations, and Brian Tully talks about automakers entering the power business.

World Energy Monthly Review offers a no-holds-barred perspective, timely information and in-depth analysis on energy issues. To read these essays, please visit www.WorldEnergySource.com/WEMR.

World Energy Monthly Review joins World Energy Magazine, Television, Educational Programs and the World Energy Source in providing unparalleled news and editorials. Learn more about World Energy products at www.WorldEnergySource.com.

Source: Business Wire

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